Betsi Fores

A conservative policy group warns of unintended consequences if states sales tax for online purchases, maintaining that the process would be costly and inefficient.

If passed by Congress, the Marketplace Fairness Act would allow states to collect sales taxes on all goods purchased online, except for retailers who collected less than $1 million in revenue.

This means that all companies online would be subject to the nearly 9,600 separate tax jurisdictions around the country, which some argue is too burdensome for smaller businesses.

“The software needed to comply with these thousands of tax rules barely exists, and is often faulty and expensive,” National Center for Policy Analysis report argues.

“The burden on small online retailers of complying with 50 state tax regimes is a de facto barrier to entry and gives local retailers an unfair advantage.”

The online sales tax bill is being sold as a fairness issue, protecting brick and mortar stores. States, aching for revenues, have called the measure a way to close the largest tax loophole.

“The states say the absence of physical presence is a tax collection discrepancy that allows online retailers to sell products for less than the brick-and-mortars. The National Conference of State Legislatures estimates this tax discrepancy will cost states $23 billion in avoided taxes in 2012,” NCPA writes.

There are two ways online sales tax collection could be done.

A destination-based tax system would be collected by the seller, but given to the state where the item is being sent. It would require online retailers to “verify buyers’ home sales tax rates, creating a two-tiered system in which businesses are treated differently based on their business model,” NCPA explains.

The alternative option would be an origin-based system where sales tax would be collected and paid to the state where the online retailer is based. This option is much more in line with the physical-presence standard already in place and would make the process easier.

An origin-based system would also allow for competition among states with higher and lower tax rates.

NCPA suggests a more favorable alternative tax regime would be a flat-rate income tax that would encompass all consumption spending.

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